Article by Heather Self, then Vice-President of the CIOT and a partner with Ernst and Young, published in April 2001 issue of Tax Adviser.A budget for the common man – or woman?
Despite Gordon Brown’s promises of a Budget which would set out his vision for the next five years, there was not much of a fanfare about his speech. It had a definite pre- Election flavour: lots of measures aimed at pleasing, or pacifying, the floating voters, and nothing too difficult which might upset big business in the way he did last year with double tax relief (DTR).
It is interesting to speculate what a psychological profiler would make of Gordon Brown, based on his performance as Chancellor. I think one might deduce that he is a man of high moral principles (a son of the Manse, perhaps?), who believes in helping the deserving poor and that people should earn their rewards rather than receiving free handouts. Enterprise is to be encouraged, but big business should be regarded with suspicion – the idea that some businesses are large because they have been successful, and are driving the health of the economy and providing significant employment, does not seem to be readily accepted.
This Chancellor very clearly believes in tax as an instrument of social policy, as evidenced by the continued expansion of the various measures described as tax credits of one sort or another (and many tax theorists would point out that there are several, quite distinct, types lumped together in that description, some of which do not merit the label of a ‘tax credit’ at all). A natural, and in my view unfortunate, consequence of this is that fairness is pursued to almost any length, with very little weight given to the argument that this increases complexity to an excessive degree. The paradox that complete fairness leads to infinite complexity, which is itself
unfair since no-one can understand how much tax they are expected to pay, has not been grasped.
So what did he actually do this time? The overall economic effect was much as expected: £4bn of tax cuts and £2bn of expenditure increases. This is not the pre-Election giveaway that we saw from some of his desperate predecessors in the late 1970s: a cynic might argue that with Labour looking likely to win the Election easily, there is no need to waste money on bribing the electorate. Indeed, with the Budget surplus for the current year now forecast to be some £6bn higher than the Treasury said in November, overall his measures represent a tightening of fiscal policy: clearly he is still friends with the lovely Prudence.
The main personal tax measures are aimed at families and pensioners, with changes to the Working Families Tax Credit, the Children’s Tax Credit, the introduction of the Pension Credit and an extension of the ten per cent band. The Institute’s main concern with all of these measures is their impact on those with low incomes, particularly in terms of the complexity and bureaucracy which they are expected to deal with. For example, the increase in the ten per cent band means that many more pensioners will be entitled to reclaim the difference between 22 per cent and ten per cent tax on their savings income: how many will know how to do this and have the confidence to ask for the forms? How much will it cost the Government (and savings institutions) to keep running Taxback campaigns every few years? We, and many other commentators, continue to campaign for a simplification of the rate structure and an emphasis on
increased personal allowances rather than tinkering with the numerous bands of income.
Further up the scale, many of those who might reasonably be considered well off – with family incomes in excess of £40,000 – will now be entitled to benefits. Will they bother to claim their entitlement, or will some of them feel embarrassed and decide the money should be left with the Government? (Personally, I’d claim it and donate it to charity if I felt that worried about it!) The example which I thought highlighted this complexity was the announcement that the ceiling for Working Families Tax Credit would be extended to £50,000 (from £40,000) for the first year of a child’s life. Would it really have been any worse, in policy terms, either to raise the limit to £50,000 for everybody or to give the extra money just to those with incomes below the general limit of £40,000?
Perhaps the most cynical comment I saw in the newspapers’ post-Budget interviews came from a single mother, who said that the increase in Children’s Tax Credit would be enough to pay for her extra smoking costs, since the Chancellor did not increase tobacco duty by as much as expected!
In general, excise duties were held level or even reduced, on a variety of measures such as beer, wine, spirits and petrol. This may have had something to do with pleasing the voters, but is probably more a recognition that some things really have changed in this more global economy. My recollection of basic economic theory is that if elasticity of demand is high, then raising prices (in this case, duty rates) simply results in a loss of overall revenue, since people will switch their purchasing power to alternative suppliers – as evidenced by the seemingly unstoppable tide of cigarette smuggling in particular.
The starkest example was the abolition of betting duty and its replacement by a profits tax. Again, this was not designed to please the punters (sorry!) but was a simple recognition that the growth of internet betting means that betting duty was no longer collectible. Where else might this lead in the future? There are potentially profound implications for VAT on goods and services which can – and will – be supplied electronically, and in the longer term it must be questionable whether the corporate tax base is sustainable as business risks and functions become truly mobile on a global basis.
At least for the present, the corporate sector remains a rich source of revenue for Gordon Brown. Although there were no fundamental changes in this Budget – and indeed, some change which had been expected has been deferred – there were some major areas which the Institute will continue to focus on over the next few months. These include the taxation of intellectual property, the reform of capital gains tax on sales of substantial shareholdings, potential changes to the forex, financial instruments and loan relationships provisions and a move towards an accounts basis of taxation, at least for smaller businesses.
We have been consulting on intellectual property for some two years now, and had hoped that we might see legislation this year: in fact, this is still a possibility as we have draft clauses with a deadline for comments of the end of May. A major advance on the previous proposals, and a measure which the Institute argued hard for, is the possibility of some form of reinvestment relief being retained, particularly in relation to disposals of goodwill.
On substantial shareholdings, the big question is whether any relief should be in the form of a deferral or an exemption. There is almost unanimous agreement among advisers that an exemption would be preferable in freeing businesses from tax constraints on business transactions, particularly since any deferral would be extremely complex to legislate. The balance here is between international competitiveness (which would argue for an exemption system) and the Government’s
fear of the unknown: would there be a significant change in corporate behaviour, leading to a major erosion of the UK corporate tax base as companies choose to migrate? Businesses’ fears that an exemption would be accompanied by a restriction on interest deductibility have been largely assuaged, but there is still suspicion that this could be a late spanner thrown into the complex machinery of proposed changes.
Although there is some disappointment that neither of the above areas has been concluded yet, the Institute generally recognises that it is better to consult properly and achieve better legislation as a result. We are therefore relieved that the complex area of forex, financial instruments and loan relationships has been left for another day – although there are one or two specific anomalies (particularly in the area of
the acquisition of impaired debt) which it would be nice to address sooner rather than later.
Last but not least, there is to be consultation on whether smaller businesses should be able to submit simple accounts for tax purposes. The Institute has been researching and commenting on the question of reform of corporation tax for some time (see, for example, our discussion paper of September 1999 and subsequent update) and I am pleased to see that this topic is now also on the Government’s agenda, particularly in relation to simplification for smaller businesses. However, I do seem to recall a meeting in which I suggested that if it was too difficult to use an accounts basis for all businesses, perhaps we could at least explore it for smaller companies? The Revenue reaction at that time was that it would cause too many difficulties, particularly for companies near the boundary, and that it would be undesirable in principle to have different systems for different sizes of company. I must look back in my files to see what I said in reply…
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April 2001 by